Blogging on corporate and securities law issues affecting companies in North Texas and around the state.
Exploring legal issues related to mergers and acquisitions, public offerings (including IPOs), private placements, venture capital, entity formation and corporate governance.

Wednesday, January 26, 2011

Why do I have a picture of Wall Street as the wallpaper for this blog?

Well, for one thing, it comes free with Google's Blogger application. For another, it really captures the essence of corporate and securities law - the place where money, people, ideas, plans, and dreams come together to build businesses and the whole U.S. economy.

To practice corporate and securities law is to operate at the intersection of law and business. That was the mantra of Ron Frappier, one of the finest securities lawyers around and the former head of the corporate and securities law section of Jenkens & Gilchrist, P.C. He even wrote an excellent article elaborating on that topic which is available here: http://roadaccidentlawyer.com/the-intersection-of-law-and-business.

What Ron understood better than most attorneys is that knowing the law is great, but knowing how the law impacts a client's business is much more important. Clients generally want real world, practical business advice in light of legal risks ("What should I do now?") - not a 25 page memorandum exhaustively analyzing every nuance of a legal question without reaching an actual conclusion.

That's the intersection of law and business - and it's something try to keep in mind every day.

Tuesday, January 18, 2011

When is a secured lender not a secured lender? When a loan guarantor steps into the secured lenders shoes through subrogation following foreclosure of the borrower's equity. Suddenly, the lender owns the equity of the borrower, but the guarantor has a lien on the borrower's assets! It's what I call the Texas Two-Step Trap.

Allow me to back up and explain. Let's say a Bank lends $20,000,000 to Borrower, which loan is secured by (1) all of Borrower assets, (2) a guaranty of the loan by Guarantor, the 100% owner of Borrower, and (3) a pledge of all of the stock of Borrower by Guarantor. Now let's say Borrower defaults on the loan and Bank acquires all of Borrower's stock pledged by Guarantor at a foreclosure sale with a credit bid equal to all amounts owed to Bank by Borrower under the loan. So now Bank owns all of the stock of Borrower and the debt has been extinguished.

But wait. Bank has exercised its right to enforce the guaranty against Guarantor, thereby giving Guarantor the right to seek reimbursement from Borrower. Guarantor probably also has a right of subrogation to step into Bank's shoes as a secured creditor of Borrower. Hence, now the Guarantor is structurally ahead of Bank with regard to claims against the assets of Borrower!

One possible way for Bank to avoid this Texas Two-Step Trap is to make sure its credit bid is for an amount less than 100% of the oustanding balance of Borrower's loan. Guarantees typically provide that the Guarantor waives its right of subrogation until the lender has been paid in full.

Thanks to Lynn Soukup and Steven Weise who explored this hypothetical in their CLE presentation earlier today.

About Me

I am a partner with the law firm of Cantey Hanger LLP and a member of the firm's Corporate and Securities Section. My practice focuses on mergers and acquisitions, securities, corporate finance and general corporate matters.
I earned my J.D. from Harvard Law School in 1998, where I was Senior Editor of the Journal of Law and Public Policy. I earned my B.B.A., magna cum laude, in Accounting from Texas Tech University in 1995.

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